Financial

What is Bond Insurance?

Issuers of a bond pay a premium to a third party, who in turn provides interest and capital repayments defined in the bond language in the event of the failure of the issuer to do so. This raises the rating of the bond to the rating of the insurer, and a bond insurer’s credit rating must be nearly spotless.

The premium the insurance company requests for the bond is a measure of the perceived risk of failure of the issuer of the bond. In other words, the higher the premium the insurance company requests, the less faith they have in the bond issuer to keep to their end of the agreement.

Government bonds are rarely, if ever, insured. Municipal bond insurance began in the United States in 1971 and since then over 45% of those bonds use the insurance, usually requiring the payment of a single premium when purchasing the bond.

FSA, Ambac, CIFG, FGIC, AGC, XL Capital, ACA Financial Guaranty Corp, and MBLA Insurance Corporation are the major bond insurers in the United States. Companies who do nothing other than sell bond insurance services to a single industry are “monocline insurers”, because they only perform one form of service.